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UK Tax Haven May Be the Result of Brexit | US International Tax Attorney

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In her January 17, 2017 speech, the British Prime Minister Theresa May confirmed that the United Kingdom (“UK”) will leave the European Union (“EU”) and seek a free trade deal with the EU. The Prime Minister also appears to have made the threat of creating a UK Tax Haven if the deal is not struck.

UK Tax Haven: UK is Leaving the EU

Since the ground-breaking referendum vote to leave the EU in June of 2016, many analysts have predicted that the UK will not leave and seek some sort of a partial participation in the EU.

On January 17, 2017, the Prime Minister’s response to these doubters was clear: “No, the United Kingdom is leaving the European Union.” She also stated: “We do not seek to hold on to bits of membership as we leave.”

She also outlined the procedural roadmap to how the UK will leave the EU. In particular, the Prime Minister stated that the government would bring the final withdrawal agreement to the Parliament for a vote before the Agreement comes into force. Furthermore, the UK government will repeal the European Communities Act. Surprisingly, the Prime Minister further said that the existing body of the EU law will be converted into British law.

UK Tax Haven: The Freedom to Set Competitive Tax Rates

The Prime Minister’s speech also contained something of great interest to international tax lawyers. She stated that, once the UK leaves the EU, it will “have the freedom to set the competitive tax rates and embrace the policies that would attract the world’s best companies and biggest investors to Britain.”

Not surprisingly, the reporters, the opposition and some foreign leaders had interpreted this statement as a threat of converting the UK into a major tax haven for the European companies. It appears that the UK government plans to materializes this threat of the UK tax haven only if the UK is excluded from the EU single economic market as a result of a punitive EU action.

This threat of creating a major UK tax haven echos a similar threat made by the Chancellor of the Exchequer Philip Hammond. In his interview with a German newspaper “Welt am Sonntag”, Mr. Hammond stated that, if the UK is excluded from the EU market, the government will try to contain the damage of such a move by switching away from the European model of taxation.

Is the UK Tax Haven Likely to Become a Reality?

So, is the UK Tax Haven a certainty at this point? Probably not. I view this threat more as a negotiation tool rather than the certainty of enacting a certain plan. The UK economy is one of the most important and complex economies in the world; it is very unlikely that the British government will be even able to pursue a course of action of turning the UK into a full tax haven.

On the other hand, it is obvious that the British government will take advantage of the situation and seek to improve the country’s competitiveness through enaction of certain tax strategies. There is a high likelihood that the corporate tax rate may be lowered to a level where it is better than in most other EU countries, but cannot yet be considered as that of a tax haven.

Furthermore, it is possible that the UK tax haven will materialize only with respect to certain classes of taxpayers from certain countries. For example, the United States can be readily considered as a tax shelter for foreign individuals. The UK may be tempted to adopt a similar approach.

Finally, it is important to remember that the UK is already an attractive country from tax perspective. Its corporate rate is not high (it can even be called relatively low), there is no dividend withholding tax, favorable rules for expats, wide treaty network, and so on. Furthermore, the UK did not enact certain beneficial ownership transparency rules that other European countries already have in place.

Most likely, the UK just wishes to keep its options open for now and there is not going to be a UK tax haven in a traditional sense of this word, despite its threats to do so. International tax lawyers, however, should closely follow the UK developments for any tax opportunities that may become available to their clients.

Tax Definition of the United States | US Tax Lawyers

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The tax definition of the United States is highly important for US tax purposes; in fact, it plays a key role in identifying many aspects of US-source income, US tax residency, foreign assets, foreign income, application of certain provisions of tax treaties, et cetera. While it is usually not difficult to figure out whether a person is operating in the United States, there are some complications associated with the tax definition of the United States that I wish to discuss in this article.

Tax Definition of the United States is Not Uniform Throughout the Internal Revenue Code; Three-Step Analysis is Necessary

From the outset, it is important to understand that the tax definition of the United States is not uniform. Different sections of the Internal Revenue Code (“IRC”) may have different definitions of what “United States” means.

Therefore, one needs to engage in a three-step process to make sure that the right definition of the United States is used. First, the geographical location of the taxpayer must be identified. Second, one needs to determine the activity in which the taxpayer is engaged. Finally, it is necessary to find the right IRC provision governing the taxation of that taxpayer engaged in the identified specific activity in that specific location; then, look up the tax definition of the United States with respect to this specific IRC provision.

General Tax Definition of the United States

Generally, for tax purposes, the United States is comprised of the 50 states and the District of Columbia plus the territorial waters (along the US coastline). See IRC § 7701(a)(9). The territorial waters up to 12 nautical miles from the US shoreline are also included in the term United States.

General Tax Definition of the United States Can Be Replaced by Alternative Definitions

As it was pointed out above, this general definition is often modified by the specific IRC provisions. The statutory reason why this is the case is the opening clause of IRC § 7701(a) which specifically allows for the general definition to be replaced by alternative definitions of the United States: “when used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof … .”

Hence, instead of relying on the general tax definition of the United States in IRC § 7701(a), one needs to look for alternative definitions specific to the IRC provision that is being analyzed. Moreover, the fact that there is no express alternative definition is not always sufficient, because one may have to determine the intent (most likely from the legislative history of an IRS provision) behind the analyzed IRC provision to see if an alternative tax definition of the United States should be used.

General Tax Definition and Possessions of the United States

While the object of this small article does not include a detailed discussion of the alternative tax definitions of the United States, it is important to note that the Possessions of the United States (“Possessions”) are not included within the general tax definition of the United States. They are not mentioned in IRC § 7701(a)(9); IRC 1441(e) even states that any noncitizen resident of Puerto Rico is a nonresident alien for tax withholding purposes. Similarly, IRC § 865(i)(3) defines Possessions as foreign countries for the purposes of sourcing income from sale of personal property.

On the other hand, Possessions may be included within some of the alternative tax definitions of the United States. For example, for the purposes of the Foreign Earned Income Exclusion, Possessions are treated as part of the United States.

Thus, it is very important for tax practitioners and their clients who reside in Possessions to look at the specific IRS provisions and determine whether an alternative definition applies to Possessions in their specific situations.

Contact Sherayzen Law Office for Professional Tax Help

If you need professional tax help, contact the international tax law firm of Sherayzen Law Office Ltd. Our legal team is highly experienced in US domestic and international tax law. We have helped hundreds of US taxpayers to resolve their tax issues and We can help You!

Contact Sherayzen Law Office Today to Schedule Your Confidential Consultation!

US International Tax Lawyer Lectures at Alliance Française on Offshore Reporting

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On December 7, 2016, Mr. Eugene Sherayzen, the founder of Sherayzen Law Office and a US international tax lawyer, gave a lecture at the Minneapolis chapter of Alliance Française. The topic of the lecture was an introduction to reporting of foreign income and foreign assets for individual taxpayers in the United States. The lecture was well-attended and raised a lot of interest among the participants.

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US International Tax Lawyer Explained the US Tax Residency Requirements

Mr. Sherayzen first focused on defining the crucial term of “US tax resident”. As he explained during the lecture, the starting point for legal analysis of any US international tax lawyer is often the determination of whether his client is a US person.

During the lecture, Mr. Sherayzen covered three categories of US tax residents – US citizens, US Permanent residents and individuals who met the requirements of the Substantial Presence Test.

He also distinguished the immigration-law concept of US permanent residency (i.e. green-card holders) from the tax concept of US tax residency. The US international tax lawyer also discussed certain exceptions to the Substantial Presence Test, focusing on F-1 and J-1 visas.

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US International Tax Lawyer Emphasized Worldwide Income Reporting Requirement

Then, Mr. Sherayzen explained to the audience that US tax residents are required to disclose and pay US taxes on their worldwide income, even if this income was already disclosed on foreign tax returns.

At that point, the US international tax lawyer observed that the worldwide income reporting requirement is one of the most violated laws. Mr. Sherayzen distinguished three groups of US tax residents who are not in compliance with this law.

The first group consisted of US tax residents who were born overseas and were not aware of the worldwide income compliance requirement due to their prior experiences in their home countries (especially those which adopted the territorial model of taxation).

The second group was described as a small group of persons who were aware of the requirement and willfully violated it.

Finally, Mr. Sherayzen distinguished a third group of individuals who knew about the worldwide income reporting requirement, attempted to comply with it to the best of their ability, but failed to do so due to their lack of sufficient knowledge of US tax laws. The US international tax lawyer specifically referenced the Assurance Vie accounts as a representative case for such violations due to huge differences between the US and the French tax treatment of these accounts.

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US International Tax Lawyer Described Top Three Reporting Requirements with Respect to Foreign Bank and Financial Accounts

The third part of the presentation was devoted to the discussion of the FBAR, Form 8938 and Form 8621 (PFIC passive foreign investment company) requirements with respect to reporting foreign bank and financial accounts. The discussion concerned the types of accounts that needed to disclosed, the reporting thresholds, the due dates and how the forms needed to be filed. Some history of the forms was provided; due to time limitations, however, only a limited introduction to FATCA was provided to the audience.

This discussion produced a lively Q&A exchange between the US international tax lawyer and the audience.

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US International Tax Lawyer Discussed the Reporting of Foreign Gifts and Inheritance

The fourth part of the discussion concentrated on the Form 3520 reporting of foreign gifts and inheritance, including the filing threshold and the penalties associated with the form. Mr. Sherayzen also explained that, in certain circumstances, Form 8938 may be applicable to foreign gifts and inheritance for the purpose of annual tax compliance.

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US International Tax Lawyer Introduced the Hypothetical to Illustrate How These Forms Might Apply in a Real-Life Situation

The final part of the presentation was devoted to the analysis of a hypothetical to demonstrate how all of these information returns could apply in a real-life situation. The focus of the hypothetical was on the French and French-Canadian issues. Mr. Sherayzen also invited the audience to participate in the legal analysis of the hypothetical which was enthusiastically welcomed by the audience.

The presentation concluded with an additional fifteen-minute Q&A session.

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US International Tax Attorney On The Necessity of Anti-Deferral Regimes

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As a US international tax attorney, I am fully aware of the crucially important role that the US international tax anti-deferral regimes (the Subpart F rules and PFIC rules) play in the Internal Revenue Code. Yet, the enormous complexity of the US international anti-deferral regimes often makes some people wonder about why we even have them.

As a US international tax attorney, I feel that it is important to educate the general public about the necessity of the anti-deferral regimes and how this necessity is deeply grounded in our tax system. I also wish to address here the issue of why the US anti-deferral regimes are so complex.

US International Tax Attorney: Anti-Deferral Regimes are a Natural Product of Our Tax System

The anti-deferral regimes is a natural legislative response to the anti-deferral strategies that originate from the deep policy contradictions that form the core of the US tax system. The most important of these contradictions arose from the recognition of income rules.

Generally, the US government imposes an income tax only when income is “recognized.” The recognition rules are complex, but there is a basic asymmetry in the treatment of individuals and corporation. On the one hand, US citizens are taxed on their worldwide income which is usually (though, with important exceptions) recognized when it is earned.

On the other hand, in general and without taking into account any anti-deferral regimes, the individuals are not be taxed on the corporate income (even if this is a one-hundred percent owned corporation) until: (a) the income is distributed (for example, as a dividend), or (b) the shares of the corporation are sold.

In the past, US international tax attorneys would combine these rules with the fact that, in general, foreign corporation would not be subject on foreign-source income earned outside of the United States, to build an effective investment strategy – contribution of all investment assets to a foreign corporation in order to avoid current US taxation of the taxpayers’ investment income. If a US international tax attorney was able to extend this strategy indefinitely, then it brought his clients benefits almost as valuable as not paying taxes at all.

Obviously, such an indefinite offshore deferral of US taxation of otherwise taxable income was not considered consistent with the fundamental goals and policies of US government. This is why the US Congress deemed it necessary to enact various anti-deferral regimes to combat offshore tax avoidance.

US International Tax Attorney: Why Are There Two Anti-Deferral Regimes Instead of One?

Even a US international tax attorney would agree that having multiple esoteric anti-deferral regimes with complex interrelationship between each other cannot be the best way to combat offshore tax avoidance investment strategies. Yet, this is our present reality and it is important to understand why this is the case.

There are four reasons for having multiple anti-deferral regimes. First, the US Congress did not create all of the anti-deferral regimes at the same time. Rather, the anti-deferral regimes appeared gradually over time with multiple amendments and shifting IRS interpretations.

Second, undoubtedly, the political influence of various lobbies with competing policies has greatly hampered the creation of a more transparent anti-deferral regime and elimination of many loopholes and exceptions.

Third, as I explained above, the offshore investment policies arose from the basic contradiction between different income recognition rules of the Internal Revenue Code. This contradiction in itself necessitates a more complex approach to combating any strategies of US international tax attorneys that seek to exploit it. It is difficult to do so with only one anti-deferral regime.

Finally, the combination of the sheer complexity of international commerce, conflicting policy priorities (for example, Congress does not want to stifle the US companies’ ability to compete overseas just for the purpose of completely closing off some offshore investments) and the great variety of various fact patterns makes it virtually impossible to address the offshore investment strategies in a simple way. This factor partially explains why there is such a variety of international tax rules that form part of the anti-deferral regimes.

Contact Sherayzen Law Office for Help with Anti-Deferral Regime Compliance and Planning

If you are a US person who owns a foreign business or foreign brokerage accounts, you are very likely to run into either Subpart F rules or PFIC rules. At this point, the extremely complex nature of these anti-deferral regimes makes it a reckless gamble to attempt to conduct business overseas without an advice from an experienced US international tax attorney.

This is why you should contact the experienced US international tax professionals of Sherayzen Law Office. We have helped clients around the globe to comply with and plan for the US anti-deferral regimes, and we can help you!

So, Contact Us Today to Schedule Your Initial Consultation!